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Wednesday, Dec 15, 2004

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Roadmap for 74 pc FDI — Ministry favours segregating strong from weak pvt banks

Sarbajeet K. Sen

New Delhi , Dec. 14

IN an effort to chart out a roadmap for foreign direct investment in Indian private sector banks, the Ministry of Finance has proposed the splitting up of the banks into two categories with different criterion being made applicable to each for determining the pace and extent of foreign investment flow.

The Ministry feels that the Reserve Bank of India could explore the option of drawing up a list of "strong" private banks where the regulator could impose its proposed shareholding thresholds while in the remaining not-so-strong or weaker banks, FDI would be allowed to go up to 74 per cent in one go. "One of the alternatives we have proposed is to draw up a list of strong private banks where the 5 per cent and 10 per cent threshold shareholding limits could be made applicable. For the remaining banks, FDI could straight away go to 74 per cent," a senior Finance Ministry official told Business Line.

The private banking sector is keenly awaiting the Government's view on the FDI issue with the Finance Minister, Mr P. Chidambaram, having recently said that a roadmap for foreign investors to reach the 74 per cent limit would be announced by the end of the month.

The FDI issue has been bothering the banking community and prospective investors who have pointed out that the RBI's proposed ownership norms are not in conformity with the Government's policy. While the Government's FDI policy allows 74 per cent foreign holding, the RBI's recent draft guidelines on ownership in private banks has proposed much lower threshold shareholding levels for foreign investors.

The RBI in its draft guidelines had said, in the interest of diversified ownership, the percentage of FDI held by single entity or a group of related entities should not exceed 10 per cent of the paid-up capital of the investee bank. For foreign banks, the RBI had proposed a sharper initial threshold limit of five per cent.

The draft had also proposed that any bank (including foreign banks) holding more than 5 per cent in a domestic bank or any individual or a group of individuals holding in excess of 10 per cent would have to indicate a time-frame for bringing down their holding to that level within a fixed time-frame.

Interested foreign investors have been pointing out that the low threshold levels proposed by the RBI would preclude large investors from getting anywhere close to the 74 per cent level.

The RBI is currently working on a second draft after intensive discussions with the Government and other stakeholders in the banking industry.

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